Tax Yourself 20% to Earn $5 million

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Adam Parris
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ASX Stocks

This post is an excerpt from the book Parris’s TOP 50 ASX Stocks 2020.  I invite you to use this 20% discount code –  VO0VAX3O1E  – and get the eBook for only 20 bucks.

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The New York Times ran an article in 1991; titled Retiree donates Fortune to Education His name was Theodore R. Johnston.

The U.S. postal worker never earned more than USD $14,000 per year ($135k in today’s USD value) and retired with USD 700k ($6.8m in today’s USD value) in 1952. But, before he died in 1991, he gave away $35m to education.

What was the piece of advice that made him a total of $70 million?

A close friend told him to impose tax 20 per cent on his wages, and then invest that 20 per cent straight into stocks. That’s it.

Theodore only purchased UPS stock, but he consistently purchased stock up until he retired.

The three keys to his success, which we can apply are;

  1. Compound interest.
  2. Consistently saving money and purchasing stocks with those savings each year.
  3. Select high-quality stocks – You’ll need an investment framework.

“It makes a great deal of sense to compound wealth steadily rather than going bust. Wouldn’t you rather be sure of a good result than hopeful of a great one?”

–  Kerr Neilson, No.23 Get Rich Slowly: Reflections on Investment.

Let’s look at the numbers.

According to the Australian Bureau of Statistics (ABS), the average Australian family ( household) earns approximate $60,000 per year and would pay about ~$11,000 in tax. Then after-tax income is ~$49,000.

And, from the Australian Federal Governments MoneySmart’s website, you’ll find a handy compound interest calculator we can use to calculate the returns.

Every year this family taxes itself 20 per cent to save and invest into shares. They are saving $816 per month, which equals $9,800 per year. The $9,800 is invested every year and earns a CAGR of 8 per cent.

In 5 years, the family has saved and invested $49,000, which made them $13,092.

ASX Stocks

Moneysmart.gov

Moving forward ten years, $98,000 saved, invested, and making them $55,326.

ASX Stocks

Moneysmart.gov

Over 40 years, this family has accumulated $2.75 million!

ASX Stocks

moneysmart.gov

But here’s the best part!

I haven’t included the dividends amounts the family would have received over that time. And if the family reinvest the dividends back into shares then that $2.7 million would more than likely double to $5 million!

In the next chapter Parris’s 10 Stock Portfolio, you will see how you could be earning 8 per cent CAGR.

The younger you start the more power the effects of compound interest. If you can get your kids into the habit of saving – Scott Pape, the Barefoot Investor, would have some great ideas for your children – and teach them how to invest into shares in their teenage years, then by the time they reach their 30s, there’s a good chance they’d be millionaires.

If you’re a late bloomer, like me, don’t panic. From our example above, you could accumulate $5 million by the age of 80, plus any superannuation accumulated in that time. Don’t be surprised if you earn more money than your super fund.

Buy the eBook here at $25

Article by Adam Parris, Searching For Value